Corporate Governance and Entrepreneurial Firms

Although topics in corporate governance have been present in literature for almost a century, most of the theoretical and empirical work has focused on large and public companies, or the "Berle-Means-Corporation" in which fragmented ownership, caused by the separation of ownership and control, shifts power in the firm toward managers. While this research has improved our understanding of how large corporations are governed, corporate governance in small and medium sized enterprises, and in particular in entrepreneurial firms, has rarely been studied. While academia, managers, and policy makers are deeply concerned with how many jobs are created by new ventures, how much they should invest, and how much wealth they generate. In particular they are concerned in their local and national economy, for there is only scarce evidence on how entrepreneurial firms can and should organize their factors of production in a way that promotes success, and how they are governed. With the emergence of the "New Economy" that is step-by-step replacing the "Managed Economy," governance problems in these entrepreneurial firms appear. This essay offers a reflective overview of corporate governance mechanisms in entrepreneurial firms and offers an explanation on how and why they may differ from those mechanisms in large and publicly traded corporations.

We develop a conceptual framework that may help to analyze corporate governance mechanisms in entrepreneurial firms, but it may also serve as a work-horse (leading example) that compares this special kind of firm with others, like medium sized firms or large private companies with dispersed shareholders. This essay differs from previous research in two ways. First, we try to capture the mechanisms of corporate governance within an interval ranging from purely market mechanisms over contractual agreements to strong hierarchical elements, like boards. This refers to entrepreneurial firms in our setting, ranging from the single entrepreneur and single-owner-manager toward the owner-manager of a firm with tangible assets and employees. Second, we try to integrate the (micro)economic and financial theories with the management perspective. More literally, the skeleton of our framework is theoretical arguments from the economics and finance literature, while the management perspective, and in particular the entrepreneurship literature, provides the beef. We also try to discuss aspects of which we so far do not know, and identify several ideas to stimulate future research on this important and growing topic. This future research could easily be summarized in two sentences: where we observe plenty of empirical studies, most cross-sectional, we need Meta-Analysis to highlight and extract statistically significant factors 舒 "what we know." And, where there is only scarce empirical evidence about the interrelation of variables, complementarities, or substitutive relationships across factors and countries we need more in-depth studies, both theoretically and empirically, either quantitative or qualitative: "what we do not know"!